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The Economic Strategy Institute - November 6, 1997

November 6, 1997

Remarks of Commissioner Harold J. Creel, Jr.

The Economic Strategy Institute

November 6, 1997

I am here today to speak about what I hope will be a true success story. I am not referring to any specific accomplishment by my agency, the Federal Maritime Commission, or any personal achievement by my fellow Commissioners or myself. No, I am speaking about what has the promise of becoming a real triumph for those involved in or affected by our trade with Japan.

I know all of you are familiar with recent U.S. Government interaction with the Government of Japan concerning the restrictive conditions existing at Japanese ports. The trade press and national media had extensive daily coverage of the various events as they unfolded. Believe me, it was a departure from the norm for U.S. maritime commerce to grab the Nation's attention, and for the FMC to be in the national news.

Today, I would like to give you some details on the specific conditions existing at Japan's ports, how the FMC and other U.S. agencies addressed them, and finally, the resolution that was agreed to by our two governments. But first, allow me to tell you just a little bit about the FMC and the role we play in international trade.

The Commission has been around in one form or another since early in this century, 1916 to be precise. For years we performed our duties while operating within the present-day Maritime Administration. In 1961, the FMC was created as an independent regulatory agency -- Congress saw the wisdom of separating our regulatory functions from MarAd's responsibility to subsidize and promote the U.S.-flag fleet.

We are a very small agency by Washington's standards -- we have a staff of 140, and our annual budget is only $14 million. But we have a wide range of responsibility that includes granting antitrust immunity to ocean carrier agreements and then monitoring activities pursuant to that authority; investigating discriminatory, unduly preferential, or other unjust practices in our maritime trades; regulating the rates and regulations of carriers controlled by their government; certifying passenger vessel operators who demonstrate financial responsibility to pay judgments for nonperformance or personal injury; licensing freight forwarders; and bonding freight consolidators.

Clearly our most significant responsibility is to protect shippers and carriers from the restrictive practices of foreign governments or entities. This authority, or better stated, this statutory mandate, requires the Commission to initiate appropriate responsive action when a U.S. interest or U.S. commerce is being harmed by unjust foreign actions. We actually have three specific mandates in this area.

First, the Commission is authorized to issue rules to meet the actions of foreign governments or carriers that create conditions unfavorable to U.S. shipping in a particular trade or in U.S. commerce generally. This is the authority we are using in our current action against Japan. Second, we are mandated, after appropriate investigation, to offset any foreign government law or regulation, or practice of foreign carriers or entities, that adversely affects U.S. carriers, provided that the problematic condition does not exist for foreign carriers here in the U.S. And finally, the Commission is required to address foreign government action that impairs U.S.-flag carrier access to a foreign-to-foreign trade. As an example, we presently are assessing conditions that appear to preclude U.S.-flag carriers from operating in the Brazil/Argentina trade.

The involved statutes prescribe specific remedies, ranging from assessing monetary fees (up to $1 million per voyage), to restricting port calls or the carriage of certain commodities, to suspending a carrier's right to serve the U.S. altogether. They also grant the Commission the broad authority to initiate whatever action it considers necessary or appropriate to offset or adjust adverse or unfavorable shipping conditions. Those unfamiliar with the Commission express some initial disbelief when they first learn of the extent of our ability to retaliate against the restrictive practices of foreign governments.

Despite this extensive authority, I must emphasize that the Commission is limited to addressing actions affecting our maritime commerce. I fear that our actions of late have led some to misconstrue our role in U.S. trade policy. We are an independent regulatory agency, and our responsibility is to address restrictive conditions affecting our maritime commerce. When necessary, we initiate specific retaliatory actions, usually after efforts to negotiate a bilateral resolution have failed. In essence, we provide leverage to those agencies that do the actual negotiating for the U.S. in such circumstances. We act independently and our actions should not be interpreted as reflecting the Administration's overall trade policy. Naturally, we consult with the executive agencies and continually discuss our respective positions and contemplated actions; however, the Commission is free to act apart from any ongoing negotiations or diplomatic endeavors.

The Commission has a longstanding and a very effective record of dealing with a host of foreign government practices in various trades. We have addressed restrictions against third-flag carriers in our trade with Ecuador, Venezuela and Colombia; laws preventing U.S. companies from establishing subsidiaries in the PRC; discrimination against non-Korean intermediaries by the Republic of Korea; restrictions on U.S. flag carriage of military cargo to Iceland; and general cargo reservation schemes in Argentina, Brazil, and Peru. And that is not a complete listing. I am proud of the Commission's accomplishments and vigilance in this area.

But how about Japan? That's what you've asked me to speak about. What was this maritime flap with Japan all about, and why was it necessary for the Commission to request U.S. Customs and the Coast Guard to detain Japanese-flag vessels? This answer is simple - reciprocity. This is a fundamental issue of fairness. We are merely asking that American shipping companies have the same access to Japan's ports as Japanese companies have to U.S. ports. That is all. Japan's port practices discriminate against non-Japanese companies. American ports do not discriminate. Moreover, the Government of Japan made a commitment in April to eliminate those practices. But it failed to live up to that commitment.

The Commission has focused on a set of complex, arbitrary procedures for addressing operational matters at Japan's ports, known as the prior consultation system and the exclusion of non-Japanese companies from that country's harbor services industry. All port operations in Japan are controlled by an association of companies who provide harbor transportation services -- the Japan Harbor Transportation Association, or JHTA. These conditions and JHTA exist with the approval of the Japanese Government.

Under the prior consultation system, carriers serving Japan must receive permission from JHTA about any operational matter involving Japanese ports or labor no matter how minor. There are no written standards for approval or denial and no way to appeal an adverse decision.

JHTA essentially operates with the blessing of the Japanese Government. Japan's Ministry of Transport has broad authority to oversee and regulate JHTA's activities and business practices. MOT permits JHTA to wield unchecked authority, and overlooks its arbitrary and often anticompetitive actions. Additionally, MOT licenses any party desiring to perform harbor transportation services in Japan. MOT uses this authority to restrict entry and shield JHTA and its members from foreign competition -- U.S. carriers, as well as those from other nations, are precluded from initiating port services. By establishing this virtually closed market, the Japanese Government gives JHTA no reason to reform. Carriers must endure an inefficient and unworkable system that drives up costs and frustrates innovation. These unfair conditions have existed in Japan for over a decade. The Commission has been monitoring them for quite some time, and after formally soliciting information from carriers in September 1995 and developing additional information, it became clear that no resolution was in sight. Accordingly, we issued a proposed rule in November of 1996 which warned the Japanese that fees would be imposed if the unfair conditions were not rectified. Faced with no significant progress, the Commission made that rule final in February this year, calling for monetary sanctions of $100,000 per voyage beginning April 14.

The Final Rule was the first of several Commission measures which helped bring the Japanese to the negotiating table with a more serious determination to resolve the existing problems. Prior to April 14, our two governments hammered out an agreement whereby the Japanese agreed to achieve certain reforms by July 31. This development convinced the Commission to postpone sanctions until September 4.

Unfortunately, the Japanese failed to meet their April commitments and July 31 passed with no reform in place. They sought a further delay of sanctions immediately prior to September 4, but the Commission had no basis to grant this request. Fees began accruing that date, with the first payment due October 15.

I must admit that I was amazed at the Japanese reaction, and inaction. After the expected criticism and cries of foul, there was nothing. And I mean nothing. The Japanese calculated that they had until October 15, the date of the first payment, to settle the dispute. Notwithstanding our statements to the contrary, minimal progress was made through September and early October. As October 15 approached, government discussions intensified. Positive movement actually occurred. While negotiations continued through October 15, we awaited payment. Despite prior assurances though, we were shocked and dismayed when the Japanese carriers refused to pay. Therefore, we took the next step.

As authorized by statute and specifically spelled out in our Final Rule, the Commission voted to request U.S. Customs to deny clearance of Japanese-flag vessels and the Coast Guard to detain them in port. Over the course of two days, government negotiations at the highest levels went on literally nonstop, and the "obscure" Federal Maritime Commission suddenly became "the little agency that could." Most importantly, the Japanese realized that the U.S. Government was serious. Subsequently, an agreement in principle was reached that called for concrete steps to eliminate the barriers that impeded Japan's harbor services industry. For the first time, commitments were made at the highest level of the Japanese Government in the person of the Japanese Ambassador to the U.S. Also, President Clinton, acknowledging this longstanding problem, hailed Japan's pledge to liberalize its port practices as the very resolution the U.S. had been seeking. I remain convinced that absent firm FMC action, the Japanese would not have come to the table to address their port practices.

It never became necessary for the Commission to officially transmit its detention letters to Customs and the Coast Guard. A full week of bilateral negotiations, replete with the normal haggling and continuing attempts to stretch the envelope beyond the edge, resulted in documents memorializing the government-to-government agreement. While the Commission was not the negotiator, a major sticking point did involve us. The press reported it as a standoff on money, and although that was an issue, the real hangup concerned the Commission's future oversight authority. The Japanese carriers were adamant in their desire to preclude the Commission from targeting them for future sanctions. That situation was settled, but not before it again became necessary for the Commission to rely on its independent status and broad statutory authority to convince the Japanese of U.S. resolve. The Japanese paid $1.5 million of the $4 million in fees that they owed, and our rulemaking and complete oversight authority remain intact. The agreement reached by the governments is in the process of being ratified by all involved parties, and we hope that will occur very soon.

The Commission accepted the partial fee payment in consideration of what some have described as a "historic breakthrough." We concluded that our main objective -- to bring pressure on Japan to correct its restrictive practices -- had been achieved. On the other hand, sanctions are our primary means of convincing governments to rectify unfavorable conditions. Therefore, total compromise of the fees was not an option, as it would remove any real incentive by governments to address problems expeditiously. I will close by repeating my view that this has all the makings of a success story. Naturally, ratification of the involved agreements simply completes one phase of the process, albeit a crucial one. We fully realize that implementation of the detailed reform framework is the real key. That is why the Commission would not budge on its future monitoring role. Until the specific reform proposals are effectuated and the results assessed, the FMC must be directly involved to ensure that no conditions unfavorable to shipping persist. The unanimous Senate Resolution on that very point testifies to the importance of the Commission maintaining an active oversight role.

But I am extremely pleased with the situation as I look on it today. Our underlying statute worked as intended -- the threat of sanctions by an independent FMC was instrumental in bringing about an agreement. Our interaction with the U.S. negotiating team was extremely effective and productive. We never lost sight of the desired objective we mutually sought, and our continual focus on that end enabled the U.S. to speak with one voice. And most importantly, a mechanism is in place that can have a very positive impact on the flow of commerce with a major trading partner. The beneficiaries will be not only the shipping companies who operate in Japan -- U.S., Japanese, and foreign alike -- but also U.S. importers and exporters, ports, labor, and ultimately the American consumer. Indeed, all nations that trade with Japan and Japan itself will benefit by the more open and efficient market the reforms should produce.

I am confident that we will achieve the desired results. And I can assure you that the FMC, in line with its statutory authority and firm resolve, will see this situation through to the end. I thank the many individuals and groups who have supported us in our efforts, and I thank all of you for listening to me today.